New Home Sales Downshifting?

As housing starts are expected to soften, the costs of building materials are expected to continue rising. This could signal a downturn in the market, as builders get "squeezed" and profit margins dwindle. That pressure could make builders more cautious, and help fuel more slowing in the market.

The question now (which is being asked more frequently as 2006 continues) is: will the landing be "soft" or "hard"?

There's still little agreement among economists as to how the new home market will absorb such pressures. One pessimist, Ed Sullivan, chief economist of the Portland Cement Association, suggests a recession-like housing spiral isn't so far-fetched. He points out that the disparity between incomes and home prices is at its greatest level in at least a quarter century, and that the upward trend in mortgage interest rates could make it harder for adjustable-rate borrowers to keep up on their payments.

But few others in the housing industry look for a serious decline in activity anytime soon, given that mortgage rates are still low by historical standards and demographic trends are still favorable. Rather, there remains strong sentiment that 2006 will remain healthy for housing, but that builders and suppliers will have to tighten their belts a notch or two.